Justifying Your EBITDA – Eastwind Business Solutions
Importance of Balance Sheets
It is important not to ignore balance sheets when it comes to representing the financial health and aspects of a business as well. Smaller businesses typically focus strictly on profit, and this factor can result in balance sheets not being reviewed as often as they should be.
A balance sheet needs to be recast in a way that the potential buyer truly understands the assets and liabilities that are transferred on closing. It is better to recast the balance sheet upfront to what is actually included with the business, as the end result can be items popping up during due diligence causing hiccups in deal making and negotiations.
For example, many times we see that business owners may park large amounts of cash in their business and on their balance sheets – over and above what is normally necessary. The minute a potential buyer sees a $500,000 cash position on a business when a $100,000 working capital position is needed, they are going to want that $400,000 cash to be included with the business. That’s fine if they are willing to pay $400,000 more for the business.
The same is true with liabilities. If you intend to convey the business without debt – if $500,000 in liabilities is relieved from the business, the value and burden of debt on the business logically increases by an adjusted amount in cash flow that is not needed by the business moving forward. This mathematically (and logically) increases the value of the business based on the cash flow used against the multiple used for valuation. Relieve $100,000 debt service to the business against a 3 multiple for the value equates to an additional $300,000 in value and price that the business should sell for.
As this article underscores, selling a business is a process with numerous moving parts. Well organized and solid financials – defensible EBITDA and operational health – represents to buyers and investors a sound and well-run business with an owner that is professional and realistic in their expectations.